No More Learning

However the setback will elevate public debt to the high distress risk category, and the new government should aim to reprise economic management targets missed under the last full Fund arrangement, including on arrears accumulation and state electricity company overhaul. The central bank and finance ministry seem committed to tighter fiscal and monetary policies and have hiked bank reserve requirements to slash credit expansion to 5 percent, but internal capacity and safeguards remain weak, and future engagement will depend on stronger teams in place, the paper suggested.

Venezuela’s self-generated economic meltdown worsened last year with estimates of 20 percent output shrinkage and 800 percent inflation, as Vatican-mediated talks between the Maduro regime and political opposition reached an impasse over prisoner release and parliamentary power revival. Free trade bloc Mercosur, where Argentina-Brazil ties have warmed under new leadership, ousted the country for anti-democratic behavior and the Washington-based Organization of American States may also suspend membership. Families of jailed leaders have come to the US in a bid to influence the Trump Administration to harden the bilateral stance and decry the overall rule of law absence. The President declared 2017 as “new economic history” by naming a ruling party socialist deputy to head the central bank who has advocated exchange rate unification and other changes. However he will face continued control preferences among the President’s close advisors, so that adjustments are likely to be minor especially with the recent doubling of oil prices. Available reserves are around half annual $20 billion import needs and external debt service remains important after state fuel company PDVSA’s short-term maturities were extended and it lost foreign partners and may no longer have available cash for public social spending. Both direct and portfolio investment have dried up with even China cutting its losses after a reported $50 billion in credit for hydrocarbon deals the past decade may have been washed away in a default storm.



India’s Relentless Cash Squeeze Cascade
2017 February 13 by admin

Posted in: Asia
After a 2016 5 percent loss on the MSCI Index Indian shares were further saddled with GDP growth slipping below 7 percent, with the December PMI at a 3-year low under 50 due to the immediate demonetization effect of eliminating high-denomination banknotes representing 85 percent of currency in circulation. Auto sales as a consumption proxy were down double-digits, and according to small business surveys thousands of firms shut their doors or shed a large worker share. Housing transaction dropped 45 percent in the last quarter with a “complete standstill” described by industry experts, as Prime Minister Modi promised additional steps against “black money” ahead of a big March state election round which shows the opposition BJP likely to regain support in early opinion results. The Prime Minister’s image was dented by appearing to mimic the pose and dress of independence hero Gandhi in a public photo, and the supreme court head stepped down after months of mutual recriminations between the judiciary and ruling coalition lawmakers over respective powers, especially concerning boundaries between government and religion. Consumer inflation has been a bright spot and is under 5 percent with food price production, setting the stage for rate easing as banks are also flush with liquidity from rupee return allowing them to cut borrowing costs. However they are still contending with an estimated 15 percent bad loan ratio under stricter classification standards, which the new central bank head has signaled for possible review since the monetary reform he was not informed or consulted about in advance. Although an experienced technocrat he has come under criticism for official subservience to the sudden decision and failing to stress the lack of alternative electronic payment access for rural and poor savers. Conspiracy theorists have posited that his predecessor Rajan may have been removed as a potential impediment, and foreign investors who have been overweight local bonds are also upset quotas remain in place without the same drive to join JP Morgan’s GBI-EM index.

In Indonesia, where the MSCI gained 15 percent last year, that bank was suspended from primary dealing after negative research comments Finance Minister Indrawati called “irresponsible. ” She insisted that international investment houses adopt new conflict of interest and transparency practices against “instability” while insisting they were not censorship. JP Morgan later upgraded its recommendations as growth and fiscal policy stay largely on track, and foreign ownership of domestic government debt slid just slightly from one-third after the actions. However the Minister’s initial warm welcome may have evaporated after her credibility also suffered from overestimating the tax amnesty take. Korean shares, after a 5 percent jump in 2016, are under their own crisis microscope after presidential impeachment and chaebol executive arrests in an influence-peddling scandal which have widened valuation discounts to regional peers. The won has shed 8. 5 percent the past quarter to help revive exports, although the 2017 GDP growth forecast was lowered from 3 percent to 2. 5 percent. The next President will be expected to more effectively attack crony capitalism against the backdrop of solid current account and budget positions, although Trump administration military and trade pushback could be another existential possible cross-border clash.





The Czech Republic’s Flailing Floor Plans
2017 February 6 by admin

Posted in: Europe
Czech Republic equities after a 10 percent MSCI loss in 2016 were thrown by December’s 2 percent on-target inflation showing, which could mark abolition of the post-crisis 27/euro currency cap introduced during deflation. Two original peg backers on the central bank board leave in February as speculation mounted that the rate could be freed in the second quarter. Rising oil import prices and food taxes were major causes of the uptick, as the core level stays under 1. 5 percent, and officials are cautious about the longer-term trend and also about potential euro weakness against the dollar with Washington’s new fiscal and monetary policies. Despite the government’s increased pro-business leanings the stock exchange has been quiescent with scant trading and offering activity as it reconsiders alliances and platforms with neighbors. Hungary has continued its own route after the bourse’s central bank takeover, designed to encourage small firm access and privatization restart with limited success so far, although it was up over 30 percent last year. Inflation there could return toward 3 percent on labor shortages, but interest rate firming is out of the question with the unconventional monetary approach still stressing discount commercial on-lending. Prime Minister Orban has redirected his fire from Brussels to perceived unelected critics at home, including the Soros Open Society Foundation. In the wake of communism’s collapse his political party was an ally, but in recent years and especially following the Mideast refugee influx, it has been accused of internal meddling and opposing “Hungarian values. ” With border fence placement the movement has stopped and the country has tried to divert asylum-seekers to Germany and elsewhere. In Poland, also MSCI-negative in 2016, inflation is within the 2. 5 percent mid-range goal with the benchmark rate unchanged at 1. 5 percent. GDP growth in Q3 was under 1 percent as the ruling Law and Justice Party got off to a rocky start and alienated wide swathes of the banking community and electorate with hard line mortgage conversion and social issue stances. State insurer PZU’s purchase of a controlling stake shed by Italy’s Uncredit in Bank Pekao will put the largest lenders in government hands for the first time since the 1990s, and overseas competitors have expressed concern although management and operations will stay independent. Parliament has been gridlocked by a Civic Platform boycott in protest of proposed media and abortion restrictions and the new budget passed with procedures it calls illegal. The standoff coincided with a European Commission notice of “systemic threat” to the rule of law, which Warsaw roundly dismisses.

The maneuvering also overlapped with NATO military exercises led by US forces as Russia moves to regain Eastern Europe sway. Shares have sustained double-digit leaps with recession ending and inflation falling toward 5 percent, but former Finance Minister Kudrin in another economic reform blueprint warned that security was in danger from lagging technology and modernization, including the inability to dismantle state ownership which has surged to 70 percent of output. Privatization plans have been rolled back with higher oil revenue and reserves, which may again enable regular ruble intervention. Despite a “tough year” in the central bank’s words for the banking industry retail giant Sberbank may turn in a $15 billion profit for 2016 with its hold on one-third of assets still an ironclad ceiling.

China’s Protectionist Wave Bashing
2017 February 6 by admin

Posted in: Asia
Chinese stocks grasped for direction with Washington and Beijing hardening commercial and diplomatic positions, as President Trump took office with “America first” vehemence and President Xi led a business contingent to the World Economic Forum in Davos asserting “no winners” in trade conflict. Trump cabinet nominees unleashed criticism against alleged currency manipulation, import barriers and illegal South China Sea moves without detailing policy responses, while dismissing talk that TPP withdrawal as one of the administration’s first executive orders would cede regional trade supremacy to the mainland. GDP growth last year came in at a two-decade low 6. 7 percent with both import and export volume dropping for the first time since 2009. Consumption is now two-thirds of output as urban fixed investment expansion softens to single-digits. Producer prices rose over 5 percent in December from previous deflation on commodity recovery, but steel and other industries still suffer from massive overcapacity to be reduced under G-20 commitments. The month broke a capital outflow streak since mid-2015 with $10 billion of inward securities investment, while US Treasury reserve holdings continued to drop, according to official statistics. Capital outflows were $320 billion in 2016 and the foreign exchange body attributed them mainly to intervention and the dollar’s surge against other currencies as it tightened controls on bank cross-border transfers to achieve equal coverage receiving and sending amounts. Consensus Yuan forecasts are for a 5-percent range devaluation this year despite stricter controls, including on the alternative Bitcoin scheme, as outbound direct investment is expected to decrease after a decade of 30 percent annual growth under dedicated developing country programs. The central bank continues to guide both onshore and offshore rates, resulting in periodic overnight liquidity squeezes, as it also raised medium-term loan costs generally. Bad credit ratios approached 2 percent by local standards, as the total portfolio was up almost 15 percent last year, half to households. Shadow financing rose at the same clip, and regulators are scrambling to monitor it at the same time they urge dollar-bond issuance locally to protect the exchange rate.

The international market remains open despite currency and trade war fears, with placement due to top 2016’s $110 billion, although the pace continues to lag maturities. The state reform commission has directed coal and steel firms to restructure debt and the equity IPO pipeline was unblocked to relieve fundraising pressure, with consultant Deloitte projecting over 400 flotations this year. Property developers must repay $8 billion in loans they intend to refinance overseas, but home prices in major cities have slipped with new taxes and restrictions. Hong Kong, with a new chief executive, has become the least affordable residential market globally with mainland spillover demand according to industry surveys as home-buying confidence dips below 50 on a widely-quoted index. The IMF in its latest review predicted 2 percent growth and warned of fiscal stress from the aging population. It praised the longstanding currency peg for stability, but cited local dollar and financial sector risks from the upward US interest rate cycle and likely “bumps” from China’s economic rebalance entering an extreme bilateral vertigo bout.

Mozambique’s Choppy Fishing Expedition
2017 January 29 by admin

Posted in: Africa
Mozambique, downgraded to selective default last year after skipping interest and principal payments, stiffened its creditor renegotiation stance on the three instruments outstanding by refusing to honor a $60 million installment on the 2023 Eurobond due mid-January. The grace period lasts another month, and despite almost $2 billion in gross foreign reserves the government has signaled another restructuring after 2016’s Tuna bond swap and pari passu treatment for all obligations as it tries to resume a suspended IMF program. An audit was ordered to reveal the scope of legitimacy of liabilities arranged through investment banks and select officials, which creditors claim misrepresented contractual terms. With the standoff the currency lost one-third of its value against the dollar and the central bank was forced to raise the policy rate almost 15 percent, although it remains negative with inflation above 25 percent. A new governor came on board at year-end to help restore multilateral confidence, and has conducted minor exchange rate intervention without provoking large swings. The $5 billion current account deficit is close to half the economy’s size, with coal accounting for 15 percent of exports. Offshore gas finds will be a major contributor toward end-decade, but financing is complicated by the current sovereign debt dispute and long-term energy price uncertainty. Big bond holders include Franklin Templeton, which led the steering committee that took a haircut on Ukraine under international official pressure. The group has started to push back with threatened lawsuits against Mozambique’s Swiss and Russian transaction advisers, and has called on the Fund to reactivate lines only with full national account and private deal disclosure while looking for its injection to secure reimbursement.

Ghana also ran up large debts at 70 percent of GDP and would have been in bond refinancing difficulty without Fund and World Bank help, especially in the volatile pre-election period. Opposition standard-bearer Akufo Addo, whose father brought independence from the UK, won the December presidential contest with 55 percent of the vote after previous defeats and stints as foreign minister and attorney-general. He condemned the “borrowing spree” during the campaign and promised tax reform and commodity diversification to bridge the near 10 percent fiscal deficit. Corruption investigations will also be a priority, after kickback allegations on large infrastructure projects supposed to be covered by oil revenue that has been slow to materialize. In agriculture the incoming President contrasted the five times more earnings from a product range in next-door Cote d’Ivoire, also the global cocoa export leader. GDP growth at 8 percent tops the sub-region, but civilian-military relations remain tentative as soldiers mutinied over back pay and other demands in January before President Ouattara reached a settlement. The army has resisted the President’s team technocrat approach aimed at luring foreign direct investment, as accused criminals from the decade-long civil war gradually face international trial. Tourism efforts were sidetracked by last year’s terror attack on the Grand Bassam resort, but the African Development Bank headquarters is again in Abidjan with frequent foreign visitors seeking to participate in new schemes like a dedicated public-private cross-border infrastructure fund which intends to overcome a legacy of past wreckage in the sector.

Trump Tremors’ Makeover Mobilization
2017 January 29 by admin

Posted in: General Emerging Markets
Last year’s rally in emerging bond and stock markets skidded in the final quarter, with expected and surprise US shifts as the Federal Reserve began hiking interest rates and President-elect Trump’s tough campaign currency and trade positions came into initial view. Assets sold off immediately after his upset win, with Mexico’s peso and the Chinese renimbi especially under fire from immigration and tariff threats, but recovered into the New Year as panic gave way to lingering anxiety over Washington’s new direction and developing economies’ growth and reform agendas. The main JP Morgan local and external bond indices ended 2016 up 10 percent, and the MSCI equity gauge was close behind at 8 percent. Fund tracker EPFR registered over $50 billion in combined foreign retail and institutional inflows, with a record $40 billion into fixed-income spurred by industrial world negative yield aversion. Despite recession, Brazil and Russia bouncing off 2015 crisis bottoms were standouts, while Turkey portfolios were slashed in the coup attempt aftermath and frontier share markets were also big disappointments with a flat composite index. For years investors have tended to look at relative global asset class and valuation rationales rather than emerging market merits themselves for inspiration. With the looming Trump test and quantitative easing fade, 2017 could continue the pattern of indirect judgment but governments and companies may finally be motivated to seize upon underlying policy and performance supports missing for the last decade.

On the macro-economic front, the IMF recently changed its forecast but both GDP growth and inflation remain stuck at 4 percent, double the advanced economy average. Monetary policy must contend with higher world interest rates and another likely depreciation bout against the dollar after mixed results in 2016. Fiscal positions may be equally constrained with prevailing deficits, as both state and private banks curtail double-digit credit expansion with rising bad loan ratios and recapitalization needs. In external accounts, trade could plummet in the short-term with “war” outbreaks but is in secular decline anyway in measurable goods and services, according to the WTO. Cross-border remittances from the Gulf in particular are also slowing, while FDI should be steady as many recipients like China become even larger source countries. Agricultural, energy and industrial commodities have rebounded but are far from former peaks, and infrastructure projects may face more competition as the US, Europe and Japan ramp up spending after relative austerity. Asian and Middle Eastern economies continue to hold trillions of dollars in reserves but increasingly must turn to foreign borrowing as backstops against persistent capital outflows. Standard and Poor’s sovereign ratings picture for twenty large emerging markets, with the exception of Indonesia, is universally for downgrades, with South Africa soon due to lose its top-quality ranking.

By asset class trends have also been uneven, with China “A” shares left out of the MSCI index still at a major discount to the S&P 500; sovereign bond issuance doubling with Argentina’s return and Saudi Arabia’s entry; and corporate debt activity again hitting $300 billion last year despite a 5 percent high-yield default rate focused on Latin American names. By region, favorites stumbled like India in Asia after its seizure of large denomination banknotes and national tax delays. In the Middle East/Africa, Egypt drew fresh interest after ending its currency peg and receiving $12 billion in IMF support, while Nigeria was removed from the local bond GBI-EM index for foreign exchange access limits. Even before Mexican and Chinese securities were battered by President Trump’s rhetoric their state enterprise reform and presidential leadership stories flagged, and they will be among the key destinations in the spotlight for potential debt and productivity turnarounds to restore positive momentum. Emerging markets as a whole, a decade after escaping financial crisis, face a credibility crunch that can best be addressed by their own structural and systemic leaps, including in next generation liberalization and privatization, regardless of outside circumstances. This year’s winners, likely in small and mid-tier markets as the more unwieldy BRICS continue to struggle, can make the category great again.

Turkey’s Nightclub Spotlight Spleen
2017 January 23 by admin

Posted in: Europe
Turkish shares and the lira continued with double digit losses at the rear of the major emerging market pack as a New Year’s nightclub assault added to a string of mass casualty incidents claimed by ISIS and Kurdish rebels, following third quarter figures showing the economy in recession after the failed coup attempt and tens of thousands of arrests. Government and military officials were fired and detained in the first crackdown phase, which has since extended to business executives tied to exiled opposition leader Gulen, allegedly the putsch mastermind with US support. President Erdogan promised no letup in the anti-terrorism campaign at the same time he is preparing a referendum on expanded constitutional powers, which Deputy Prime Minister Simsek in charge of economic policy lauds for longer-term political stability after absorbing millions of Syrian refugees and increased internal and external security threats. The currency was last year’s worst performer with a 17 percent dollar decline, and the central bank must contend with possible return to 10 percent inflation as depositors switch to foreign exchange accounts, and companies face a $200 billion mismatch in overseas borrowing which may curtail smooth rollovers since the 2013 “taper tantrum. ” The lira also sank then but the benchmark interest rate was hiked 4 percent to restore confidence, an option dismissed by the President’s team who call for lower costs and domestic currency embrace in the name of patriotism. Officials have tried to loosen dollar and euro liquidity through technical measures, while the chronic 5 percent of GDP current account deficit must be financed as foreign investors slash local bond positions. On the stock market allocation has been confined to big dollar earning listings that can also steer clear of Gulenist connections and suspicions, and their US ADRs have suffered further on uncertain diplomatic relations with the new Washington administration, despite a Trump Tower joint venture version in Istanbul. President Trump is however expected to back Cyprus reunification as a longstanding goal, with the island’s two sides continuing negotiations in Geneva. A breakthrough could reduce fiscal aid pressures on Ankara, as the Greek part emerges from its EU bailout with the biggest bank repaying emergency funds. Both countries are otherwise at odds as Turkey demands the extradition of generals who fled to Athens after the coup, against resistance from Greek human rights activists.



The lira lurch has been matched only by Mexico’s peso’s plunge, underway since the central bank governor described proposed Trump trade and immigration steps as a “horror film. ” It intervened as the level passed 20/dollar, but immediately usable reserves may be in the $15-20 billion range with a large IMF contingency credit line untapped. Following Presidential hectoring to keep jobs at home Ford Motor reversed course about a $1. 5 billion Mexican plant, triggering downgrades in 2017 FDI projections to around $30 billion. To mollify cross-border tensions, President Pena Nieto named his former Finance Minister, who resigned under a cloud of sweetheart housing deals, as Foreign Minister after Trump praised him during a controversial campaign visit. GDP growth this year will be just 2 percent and energy prices were raised in line with Pemex reforms at the beginning of January to public outcry. Perennial presidential contender AMLO has benefited from the backlash to emerge as the frontrunner for the 2018 vote, but he squandered big margins before and could again hit his own wall.



Intelligence Networks’ Gauzy Future Gaze
2017 January 23 by admin

Posted in: General Emerging Markets
The National Intelligence Council issued its latest global trends medium and long-range scenarios prepared every presidential term, and described a “paradox of progress” based on thousands of interviews in dozens of countries where power shifts create new international stress. It posits that “promise or peril” may result from the information and connectivity revolution, as recent experience has slashed poverty but also spawned the global financial crisis and populist politics. In the next five years world GDP growth will slow as American post-Cold War dominance fades with the associated rule-based international order, which is regularly subject to challenge by state and non-state actors, with an “emboldened China and Russia. ” Decades of trade and technology integration has hurt Western middle classes and drained budgets with the highest immigration flows in seventy years. A “dreary” near-term future is likely but will be colored by alternative organizational paths into “islands, orbits or communities” depending on the degree of cross-border cooperation on economic stability as well as transnational issues like climate change. Overarching themes through 2035 include population aging in the industrial world, identity-based governance threatening liberalism and tolerance, cyber and robotic systems altering conflict, and common environment and health challenges. Unconventional energy sources and biopharmaceutical products have become readily available and affordable but lack shared regulatory standards requiring a combination of technical expertise and multi-stakeholder diplomacy, the report argues. Pollution and water quality rank as developing country priorities alongside economic growth and natural disaster and emigration costs are rising with continued deterioration. ICT evolution has yielded a fragmented marketplace of contradictory news realities which frustrate consensus and also invite authoritarian attempts to shape messages. Commercial interdependence has historically been a check on war but both major and middle powers also seek to reduce vulnerabilities to potential sanctions and terror attacks. Europe faces additional shocks with undercapitalized banks and EU separatist movements like Brexit, and the US has low public trust in leaders and institutions.

Central and South America has endemic economic mismanagement and corruption, and gangs and organized crime have filled the breach. China lags on state enterprise reform and the working age cohort is shrinking rapidly, while Russia has been unsuccessful in diversifying from oil, and male life expectancy is the shortest in the G-8. In East Asia, North Korean provocation will continue with missiles able to reach across the region, and MENA governments still inhibit markets, employment and human capital, according to the analysis. In Sub-Sahara Africa breakneck urbanization overwhelms infrastructure and it will experience chronic water shortages destroying agriculture and fostering violence. India will be the growth champion but its development track remains hobbled by poor education, health and sanitation and rivalry with next-door Pakistan. In the coming decade, countries under the “island” scenario will prevail only by redressing income inequality with better job training and lifetime learning. In “orbit” adversaries can selectively work toward joint conflict resolution and public good objectives, while with “communities” governments will join with business and civil society on “soft power” transnational policy and technology partnerships. They could promote underlying state “resilience” in financial and safety networks as an ultimate paradox in ceding official control, the study suggests.

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Argentina’s Unforgiving Reputation Remake
2017 January 16 by admin

Posted in: Latin America/Caribbean
After solid EMBI and MSCI frontier index gains in 2016, Argentina securities paused on President Macri’s one-year anniversary, with a cabinet reshuffle sidelining Finance minister Prat-Gay and preparation for another heavy external bond issuance round estimated at an initial $10 billion. The fired minister’s portfolio was split in two with his deputy assuming fundraising responsibility and another appointment macroeconomic policy. He oversaw a successful tax amnesty which brought in $100 billion and $7 billion in penalty payments, but was unable to otherwise constrain the 6 percent of GDP fiscal deficit or restore GDP growth, as continuing recession dents the President’s popularity rating heading into local elections. Almost all the inflows, 85 percent from offshore, went to cover public pension increases, as the separate nominal revenue rise lagged 20 percent inflation keeping the budget hole. To trim it subsidy rollbacks were announced upon taking office but further pain has been spared by court decisions and political opposition. With the relatively loose fiscal stance monetary policy has remained tight with the central bank benchmark at 25 percent for 5 percent real rates. With these juicy yields foreign money has poured into local currency bonds and the country will soon be added to the GBI-EM gauge with a small weighting. According to new Finance Minister Caputo 2017 total official and private financing needs are in the $30-$40 billion range, and after over $20 billion in sovereign debt return last year, another big wave may not be as enthusiastically received despite the manageable 35 percent of GDP burden. In Q2 alone $10 billion must be repaid in dollar instrument amortization and to the Paris Club, and global interest rates are expected to rise with the new US administration’s spending plans, with a best case scenario for meager economic recovery at home. Minister Prat-Gay with his Wall Street background was said to lack the common touch and the elite perception played into the hands of the Peronists who still control Congress, as they also fight corruption charges against their former leader and President Christina Fernandez. She has been accused of money laundering through deals with a hotel magnate and of profiting from central bank speculation during her era of foreign exchange controls, and investigations into the regime’s role in the Iranian bombing of a Jewish center are ongoing which suggest a back channel payoff from Tehran.

Brazil after a banner 2016 remains stuck in its own scandal proliferation, as construction giant Odebrecht agreed to billions of dollars in criminal restitution to prosecutors and shareholders. Industrial output continued to drop at a double-digit monthly clip, as state debt problems lingered with a court ruling against federal help. Congress post-recess is to debate the proposed long-term discretionary spending cap tied to inflation and pension reform, as the central bank may relieve fiscal pressure with larger 50 basis point rate cuts. Infrastructure is in the spotlight as interim President Temer vows to introduce a new transport concession program after the bungled attempts surrounding the Rio Olympics. China may put $20 billion into a joint fund as the rules are rolled out, but previous road and railway schemes threw potholes into such ambitions and state development bank BNDES is no longer in financial position for repairs.

Corporate Debt’s Dangling Default Dominoes
2017 January 16 by admin

Posted in: General Emerging Markets
Last year’s corporate bond high-yield 5 percent default rate was the highest in the post-crisis period, with Latin America’s at double that damage, while the average 27 percent recovery was the lowest in five years, according to JP Morgan’s annual asset class roundup. It came despite moderation in overall distressed credit below under 70 cents/dollar, where the portion improved to 6. 5 percent from 9. 5 percent at mid-year, as the EMBI spread stands at 450 basis points over US Treasuries. Near $30 billion was unpaid, with Brazil’s Oi accounting for one-third and three Latin American names together 60 percent of the total. Missed interest owed and restructuring-bankruptcy was the main cause, along with discount and forced exchanges. China’s onshore market experienced dozens of cases but offshore was spared despite “close calls” like Glorious Properties, which needed a grace period. Europe’s 3. 5 percent level came mostly from Ukraine, followed by Russia and Turkey. Africa had a big Nigerian oil firm default, but the headline bare miss was Venezuela’s $7 billion PDVSA quasi-sovereign swap with participation short of the 50 percent threshold. Coupon and amortization obligations are $8. 5 billion over 2017 with residual credit event risk, the analysis cautions. In the last quarter commodity price recovery, capital spending retrenchment and liability management offered a rating downgrade respite, but demotions at almost 350 were triple upgrades for a 2016 “negative bias. ” Value recovery approached half 2015’s 49% norm, with Latin America and Europe lagging and Asia largely in line with the above 50 percent historical trend. One of the top results was Ukraine Railway over 80 percent while Colombia’s Pacific Rubiales and Brazilian corporates were at bottom. China property firm Kaisa was an initial casualty but the outcome a “pleasant surprise,” while Mongolian Mining prices jumped from the teens to the 50s after negotiations. From this year 100 percent-owned quasi-sovereigns will be excluded from the company default tally, with PDVSA still on the watch list after the recent distressed transaction. Issuer removal after non-payment enabled 25 basis point shrinkage on the CEMBI benchmark, and the under 50 cents/dollar most impaired category remains dominated by Brazilian and neighboring and energy industry bonds.

The 2017 forecast is for a drop to 2 percent after the peak default cycle, with maturity pickup “benign” and economic fundamentals “stabilizing,” according to JP Morgan. However in specific countries, including Brazil where a corruption saga lingers, it warns of continuing risk aversion. Repayments from speculative and unrated issuers will be $60 billion, up from $35 billion last year but should be manageable, aided by ongoing buyback operations and insolvency code overhauls. On the latter, the IMF released an update on sovereign bond collective action clause incorporation to facilitate the workout process, with 75 percent of the $260 billion nominal amount containing them the past two years. New York law has a 90 percent incorporation rate, 10 percent above English jurisdiction. Modified pari passu provisions are routinely added, and the undertakings have “no observable” pricing effect, the Fund believes. The outstanding stock without these inserts is $850 billion, and trusts are increasingly replacing fiscal agent structures for contractual implementation responsibility. Future outreach will target Africa, Asia and non-euro Europe with less participation as sponsors try to assert their collective will, the document adds.

Japan’s Errant Helicopter Heave
2017 January 10 by admin

Posted in: Asia
Japanese investment trusts continued net emerging market fund outflows as domestic bond yields turned positive and the Nikkei index was up 5 percent through December on over 5 trillion yen in central bank annual ETF buying for 60 percent of the market. New UN statistics boosted the economy’s size on estimated 1 percent growth this year and next on indications that monetary policy will switch from quantitative easing to government bond absorption in gradual “helicopter money” fiscal stimulus. Officials will target long-term yields above zero in an effort to encourage 2 percent inflation expectation, as prices again verge on deflation and the yen settles in the 105/dollar range after an immediate post-Trump election plunge. Business sentiment as measured by the Tankan survey has improved but manufacturers remain wary of China and other key overseas markets. The central bank is now a top shareholder in one-third of listed companies, and has begun to draw criticism from the over $1 trillion state pension fund and other institutional investors for large block control affecting values. The so-called third structural reform “arrow” of Abenomics has also stumbled with US rejection of the Trans-Pacific Partnership, and the Prime Minister flew to New York for a brief meeting with President-elect Trump to get reassurance on bilateral commercial and military ties. Tokyo continues to be evaluated in the Treasury Department’s regular currency manipulation analysis, and the Republican candidate called for possible renegotiation of the Okinawa base presence to secure more local payment and personnel. Japan “hawks” in Washington have resurfaced from 1980s battles urging tougher trade stances, but the argument is blunted by the country’s recessionary “lost decades” since which have also reversed banks’ global power and profitability. Smaller regional banks are struggling again with the zero-interest rate policy and anemic borrower demand, while mega-lenders have rediscovered export finance niches abroad which have come under pressure with slowing trade. In recent years they have expanded into frontier markets like Myanmar bolstered by aid agency programs which may soon be retrenched on human rights and foreign opening setbacks. The civilian-military regime headed by Nobel laureate Aung San Suu Kyi has been in the spotlight for alleged abuses of the Muslim Rohingya minority, forcing large-scale exodus to neighboring countries by land and sea. Despite headline 7 percent growth and sanctions lifting, liberalization and privatization efforts have been halting and banking and the nascent stock market still lack basic oversight.

Singapore stocks were flat through December as the hub endured a Q3 4 percent contraction on a double-digit slide in non-oil domestic exports. Local foreign exchange deposit growth has shrunk noticeably with the unwinding of China-oriented carry trades, and real estate prices have likewise softened with reduced Chinese purchases. The monetary authority has kept a neutral stance into 2017, while allowing “some flexibility” to ease especially if deflationary tendencies persist. Bank bad loans are creeping toward 4 percent of the total, and the local dollar has been in the cross hairs on more services weakness and safe haven reputation harm with implication in Malaysia’s 1MDB scandal. The Prime Minister also took a personal blow after a special appearance with President Obama to promote TPP before the treaty was consigned to the chopper.

Israel’s Pesky Path Breaking Provocations
2017 January 10 by admin

Posted in: MENA
Israel stocks were down slightly into year-end as the US refused to vote against a UN resolution condemning West Bank settlements as the outgoing Obama administration assigned both sides blame for the failure of Palestinian dual state peace talks despite Secretary of State Kerry’s shuttle diplomacy frenzy. The incoming Trump team criticized the action and named hard-line supporters as Ambassador and special Mideast envoy while proposing Embassy relocation to Jerusalem.
Prime Minister Netanyahu ignored the call as he continued with expansion of housing developments as a way to firm his party’s ideological base and offer alternatives to unaffordable urban real estate which has recently featured as a major campaign issue. Consumption-driven GDP growth topped 3 percent through Q3, and that pace should extend into 2017 with unemployment at an historic low 4. 5 percent. The current account surplus will also continue above 3 percent of GDP without export restrictions to the US with a 30 percent share, manageable oil import costs and minimal 5 percent foreign investor bond market inflow reliance. Deflation is over and the strong shekel should cap inflation at 1 percent without the central bank raising rates despite the Federal Reserve’s projected path. Geopolitics and wage pressure could upset the mix, but fiscal policy provides room with the deficit under 3 percent of GDP after a VAT cut. The “A” credit rating is intact with public debt at 60 percent of output, and commercial and assistance-related fundraising considered accessible over the medium term. The Prime Minister’s Likud Party remains relatively unchallenged with the opposition coalition in disarray, and he has survived serial scandals including an investigation into his wife’s alleged personal and official spending overlap. The Labor Party has yet to reconstitute as a strong rival, and its absence was noted by international dignitaries attending the funeral of longtime stalwart and President S. Peres.

Lebanon was up 5 percent on the MSCI frontier index through December as the lengthy impasse over a new president ended with 80-year old former general Aoun, a Christian, taking the post with dominant Shia party Hezbollah’s consent. Palestinian and Syrian refugees cannot vote and the latest census put the Christian share of eligible participants under 40 percent. President Aoun named security and economic overhaul as chief priorities, with the eventual intent of repatriating 1 million Syrians after the civil war finishes and remedying chronic electricity and public service deficiencies. Traditional Gulf visitors have shunned the beaches and nightlife with their own troubles and cross-border spillover of factional conflict resurrecting ghosts of the 1990s period. Morocco after demotion to frontier status was ahead over 15 percent as the ruling Islamic party was snubbed in favor of the insurgent Modernists promising faster growth than the current 1 percent and 100,000 jobs and state debt restraint. With an IMF backup facility, the government in power since the Arab Spring appointed by King Mohammed pared the budget gap to 4 percent of GDP with energy subsidy adjustment. Democracy activists assert that the monarch still exercises pervasive control and that family cronies are not held accountable for poor performance and scandal. They also note that phosphate giant OCP has entered deals with other authoritarian regimes including a $3. 5 billion venture just announced with Ethiopia where breakaway province unrest has been quashed.



Ukraine’s Borderline Bank Rescue Recoil
2017 January 3 by admin

Posted in: Europe
Ukraine bonds solidified EMBI index double-digit gains after the central bank, following months of hesitation in directly confronting industry leader Privatbank’s $5. 5 billion capital shortfall, seized it in a move that will swell the budget deficit that must stay within 3 percent of GDP under the IMF program, and exact bank bondholder pain under bail-in provisions. President Poroshenko appealed for calm and submitted legislation to further protect its 20 million depositors, as the political opposition lambasted the bailout as a “great robbery” and called for fresh snap elections. Shareholders headed by well-known oligarch Kolomolsky, who underwrote military operations to eject Russia-backed rebels from the East, had put in millions of dollars in a last-ditch bid to shore up the institution with a 40 percent bad loan portfolio and near-default credit rating, after rival Delta Bank was closed last year for prudential violations. The magnate had fallen out of favor as the border conflict drew to a standstill and suffered losses on other business holdings on meager 1. 5 percent GDP growth this year. Ukraine may soon be left to face the incursion on its own as incoming US President Trump has placed warmer relations with Russia seemingly higher on the agenda to include possible sanctions removal. Banking and geopolitical woes have overshadowed energy reform as Naftogaz tariffs went to full cost recovery, and anti-corruption agency and electronic tax filing launch which met Fund disbursement criteria. Releases continue to be delayed but front-loading and replenished reserves have reduced urgency, and the government pledges to tackle outstanding pension and privatization issues in the coming months assuming survival of no-confidence votes. Inflation is to fall to single digits in 2017 within a target band, but the currency could again falter toward 30/dollar to undermine control. So long as Russian commercial restrictions remain in place and the Dutch and other reject EU bilateral free trade, depreciation will offer only a limited export boost and the current account gap will be frozen around 4 percent of GDP and depend on future official financing to bridge it. In FDI agriculture has been a bright spot as the country may soon ranking third globally in food output after the US and Brazil. Giants like Archer-Daniels, Cargill and Bunge have leased vast local tracts, with outright ownership still prohibited and sales subject to a moratorium through 2018. The richest lands are located in the war zone around Donbas, and operations there have been erratic with fighting eruption despite a nominal ceasefire.

Russian stocks continued to rally as Emerging Europe champions notwithstanding the prospect of new US congressional penalties for cyber-attacks to affect the presidential contest. Oil price rebound to over $40/barrel has been the overriding positive economic story against the backdrop of persistent recession and 5 percent-plus inflation. Although mortgage rates have reverted to pre-crisis levels, consumer borrowing and sentiment is lackluster, with retail sales off 5 percent in October. President Putin, who will decide on another run for 2018, has charged the Finance Minister with drafting an ambitious structural reform agenda, but previous blueprints were routinely ignored. The central bank stayed on hold and reiterated the importance of ruble free-float as an eventual competitive safety valve, but many foreign investors preferred to focus on the Trump Administration’s tapping of former Exxon chief executive and Putin ally Tillerson as Secretary of State for a tactical buy.

Capital Flow Management’s View Vagaries
2017 January 3 by admin

Posted in: General Emerging Markets
The IMF published an updated paper on issues and trends informing its “institutional view” on capital controls since 2012, a period of greater openness and volatility addressed mainly with macro-economic and prudential policies as opposed to strict movement limits. The G-20 and OECD continue to debate revised frameworks and multilateral consistency as direct and portfolio flows recover while still lagging pre-crisis levels, particularly on bank loans and derivative transactions. In recent quarters they have swung several points as fraction of GDP often due to global shifts such as during the 2013 Federal Reserve “taper tantrum. ” Both push and pull factors contribute and domestic emerging market risks increasingly focus on both corporate and sovereign balance sheet weakness. Funding costs dropped this year aided by better current account performance, but the reduction may not last, according to the analysis. Two dozen countries such as Brazil, India, Russia, South Africa and Turkey resorted chiefly to fiscal and monetary responses, including currency depreciation intervention, to handle reversals. China and Peru loosened policy while imposing outflow curbs, while broader emergency restrictions applied in Cyprus, Iceland, Greece and Ukraine to prevent bank deposit flight and exchange rate collapse in the context of Fund adjustment programs. They typically followed previous recommendations as to scope and timing with unwinding linked to general financial sector stabilization, but also added costs in terms of administrative burden, risk premium, and market distortion. In the latest 2013-16 timeframe economies like Colombia and Thailand relied on macroeconomic tools almost entirely to counter surges as a wider range of countries adapted bank rules on loan-to-value and debt-to-income ratios as well as capital and liquidity standards. Frontier market experience in Africa and elsewhere has been different as they only began accessing global bond markets in recent years and exchange rate changes have been slower. Ghana and Nigeria introduced controls both in law and practice that were subsequently relaxed, although the latter remains suspended from JP Morgan’s local debt index for lack of access. The paper acknowledges that easy advanced economy monetary policy magnified direction but argues that improved regulation across-the-board on Basel III norms, insurance, accounting and derivatives mitigated pressure.

China will continue the capital account liberalization pattern according to its next 5-year Plan, as neighbors like Korea also relax repatriation conditions. Sequencing reflects the Fund’s preference to begin with direct investment and delay short-term portfolio opening until last. Beijing in 2015 started to tighten outflow flexibility, first with suspension of the Qualified Domestic Institutional Investor scheme, but it insists such moves are temporary and the yuan’s inclusion in the SDR basket should reinforce freer securities participation. The OECD is now reviewing its 25-year old Capital Movement code with attention to macro-prudential treatment, and the proposed Trans-Pacific Partnership, although scrapped with US failure to ratify, nonetheless detailed disruptive flow provisions. In Europe the Vienna Initiative and new Single Supervisor have developed formal and informal regimes for cross-border bank credit, and cross-regional bodies have collaborated on joint supervision. The Fund has strengthened technical assistance on the issue on missions to poorer members like Bangladesh and Myanmar, but global data gaps persist despite improvement in the Coordinated Portfolio Investment Survey. As the IIF tracks for a half dozen developing economies, a questionnaire completed by 40 members recommended more frequent even daily numbers for a worldwide cross-section matching information flow.

Haiti’s Battered Runoff Replay
2016 December 27 by admin

Posted in: Latin America/Caribbean
As Hurricane Matthew devastation lingered in a large swathe of the island outside Port au Prince, Haiti’s chronically delayed presidential election was finally held with just 20 percent turnout, but a winning 55 percent voting share by the former incumbent’s designated successor, banana farmer J. Moise. The second place candidate Celestin was 35 points behind and again alleged widespread fraud that will be investigated in a partial result audit. His victory was slimmer in the original 2015 contest that was annulled after violent protests and rigging suspicions, and the opposition Lavalas party has indicated a willingness to cooperate after such a prolonged confrontation in part to rebuild after the latest natural disaster, which has overwhelmed UN relief pledges. The IMF offered a no-interest $40 million emergency facility and estimated damage at one-fifth of GDP. The 2010 earthquake which leveled the capital wreaked far greater destruction calculated at $8 billion but also a commensurate aid response, although the government and partners jointly admit to ineffective coordination that has left thousands still living in makeshift tent cities and a 60 percent poverty rate in the hemisphere’s poorest country. One-fifth the budget still comes from international assistance and the $2 billion remittance lifeline is double exports and FDI together. Officials set up a new centralized reconstruction agency to guide efforts into the next administration, and President-elect Moise intends to prioritize agriculture, corruption and climate change. He was previously head of the local chamber of commerce, and was favored by influential families with large industrial and financial holdings in the race while campaigning as a political novice outsider. His farming enterprise had close ties to former President Martelly, but unlike other allies he avoided scandal taint and criminal gang rivalry. His experience with foreign investors was limited but over the past year and a half speeches seemed to extend promotional efforts which may be smaller-scale than showpieces like the US and Inter-American Development Bank-backed Caracol free trade park, which failed to generate promised employment and infrastructure.

Cuba and Venezuela have been allies, but their influence has waned with their own economic setbacks and leadership transitions. Fidel Castro’s death at 90 highlighted the grim competitive and growth outlook after years of incremental reforms pushing hundreds of thousands to private sector small ventures, while keeping the main commodities and tourism mainstays under comprehensive state control. Exchange rate unification does not feature on the near-term agenda despite urgent foreign business pleas, and the US embargo may now remain in place under President Trump, who assigned a staunch advocate to his Treasury Department planning team. Cuban secondary debt and the closed-end Herzfeld fund prices jumped after the leader’s passing was announced but soon settled at previous ranges with marginal GDP growth forecast this year and likely economic and diplomatic impasses ahead, aggravated by the withdrawal of Caracas’ support as President Maduro’s regime clings to survival. He removed 100 bolivar notes from circulation in an effort to curb smuggling and hyperinflation estimated at 500 percent, on 10 percent output contraction and a 25 percent of GDP fiscal deficit. The state oil company completed a short-term bond swap to avoid default and had to sweeten initial terms as the government also relaxed bank reserve requirements for allocation to strengthen shelter.

China’s Wooly Work Conference Antics
2016 December 27 by admin

Posted in: Asia
Chinese stocks scrambled for traction despite equity raising up 30 percent through December and a record 50 IPOs in November, amid general securities panic with bond market futures suspended on a sudden 100 basis point 10-year sovereign yield spike coinciding with the US Federal Reserve 25 tick nudge. The central bank injected RMB 600 billion in immediate liquidity to calm nerves, as the Central Economic Work Conference convened with the motto “pursuing progress while maintaining stability” and proposed additional fiscal stimulus and exchange rate flexibility. The onshore-offshore Yuan gap has widened to imply a near-term 7/dollar level, with reported monthly capital outflows increasing to $70 billion in November, and hard currency bank deposits up 10 percent. The authorities have cracked down on outbound credit card, insurance and company acquisition channels in preparation for January’s reset of the individual $50,000 access cap, as multinationals cite blockages and delays in money transfers which could stifle future FDI. According to the IIF and other public and private sector sources the biggest outflow category continued as loan repayment and portfolio exit at $300 billion though Q3, as compared with an estimated $90 billion in resident capital flight. November data showed solid industrial production and fixed asset and real estate investment with high single-digit gains, and retail and property sales ahead at double that pace to attain the 6. 5 percent GDP growth target. However developer bond sales have come to a screeching halt with dollar yields hitting 7 percent and local issuance through the Shanghai exchange affected by stiffer requirements. Mortgages remain the bulk of new loans and although ratings agencies assign a stable outlook, big players like Vanke have started to forecast hefty housing price drops into 2017. Banks will no longer be able to mask exposure through off-balance sheet wealth management products under revised rules scheduled for the first quarter, as shadow credit exploded toward end-2016 with trust loans at a 2-year peak.

The IMF repeated the urgency of tackling the 170 percent of GDP corporate debt, with 800 billion due next year, one-third foreign. Moody’s puts defaults close to the 3 percent “danger line” among the 3500 firms rated, as the Fund noted the absence of “buy-in” across government and business levels for restructuring. The stakes have increased as the incoming Trump administration signals tougher commercial and diplomatic policies, and the US and EU sustain objections to “market economy” treatment 15 years after WTO entry to facilitate anti-dumping penalties. Beijing threatened “real crisis” if Washington changed the One China practice to explicitly recognize Taiwan, and trade retaliation since China takes 15 percent of US exports. A special White House Trade Council was established with academic critic P. Navarro in charge, and Commerce Secretary-designate Ross has blamed unfair competition for gutting manufacturing firms his distressed fund acquired the past decade. Against this backdrop once popular Chinese debt has disappeared from the most-frequently traded list in EMTA’s quarterly survey, while India has catapulted to the top, followed by Brazil, Mexico and South Africa. Of the $1. 25 trillion turnover, two-thirds was in local currency and the external category was evenly divided between corporate and sovereign as investors gird for rough work balance.

Iran’s Extended Sanctions Slant
2016 December 21 by admin

Posted in: Asia, MENA


The Tehran Stock exchange index dropped 5 percent, as President-elect Trump won the contest with a signature vow to “rip up” the Iranian sanctions relief for nuclear monitoring accord with the US and five other countries. He also nominated an ardent congressional critic as intelligence agency chief who recently lambasted new Treasury Department guidance allowing possible participation in minority owned Revolutionary Guard indirectly-controlled ventures. Congress before adjourning to usher in the new administration passed a 10-year renewal of core bilateral sanctions still banning financial system dollar access. Iranian banks are to fall under stricter regulation with proposed new legislation as bad loans may be double the 15 percent of the total officially reported. A handful of second tier Asian and European banks have forged correspondent relationships, and an EU thaw in wholesale prohibitions against the big state-dominated lenders implicated in terrorist finance may have begun with Bank Saderat’s likely removal at Greece’s request. The Joint Plan of Action uncertainty overshadowed a $5 billion venture announced with France’s Total and China’s national oil company in the South Pars field, as OPEC members with Iran’s return to 2 million barrels/day announced production cutbacks to boost the world price. Real estate and telecoms have also drawn foreign interest as Vodafone entered a local partnership and malls and office towers are under construction with Gulf, Turkish, German and other international tenants. Germany’s Economic Minister visited in October with over 100 business executives in tow to focus on infrastructure in particular with rail, energy and metals contract signed. The auto sector was a major stock market stock market draw as France’s Citroen and a subsidiary of the giant Saipa conglomerate are in cooperation talks, as Renault negotiates on a direct government operation. The IMF forecast was upbeat for the fiscal year ending March 2017 with 4. 5 percent GDP growth and 9 percent inflation, as it repeated calls for banking and exchange rate system cleanup. Financial listings continue as equity laggards, and the free-market rial/dollar rate has slipped below 35,000 earlier seen as a floor.

Egypt was down 20 percent on the MSCI index through November as the cost of a $12 billion agreed Fund infusion was free float of the pound, which careened from the official 8 to over 15/dollar in commercial trade amid continued shortage. An initial $2. 75 billion was disbursed contingent on big fuel subsidy and civil service cuts and VAT introduction to contain the 10 percent of GDP fiscal deficit. Inflation could hurdle toward 20 percent with currency pass-through before consolidation, but tourism down 40 percent annually could benefit a cheaper destination aided by the lifting of source country travel warnings. However a bombing at Cairo’s main Coptic Christian church has again heightened security jitters as President Al-Sisi’s popularity rating dips toward 60 percent. He was one of the few foreign leaders who met with President-elect Trump while he was the Republican candidate as the new team in Washington may adopt a warmer diplomatic stance. Gulf ties have frayed as the GCC suspended $10 billion in annual aid to focus on its own budget and current account woes, and remittances as a key lifeline have also slipped and could spike current 15 percent unemployment which angry youth and democracy activists may no longer sanction.

Central Asia’s Frozen Financial System
2016 December 21 by admin

Posted in: Asia, Europe
A new World Bank report examining Emerging Europe and Central Asia’s 25-year financial sector reform record cites recovery since the 2008 crisis, with lingering weakness in a boom-bust credit pattern and lack of non-bank and securities market diversification. Regional bad loans average almost 10 percent, and compliance with Basel III and EU regulations has been elusive particularly in the least open eastern economies. Several countries at different development stages including Russia, Turkey, Armenia and Tajikistan signed the Maya Declaration on financial inclusion without underlying resilience to reach targets. Since independence banking’s fraction of GDP quadrupled to 55 percent but the late 1990s and 2000s featured consecutive crashes sparing only the least integrated and backward systems. Liberalization and control trends have exacerbated swings, and liquidity bubbles illustrated by 200 percent range loan-deposit ratios joined with foreign currency mismatches for major shocks. The “spare tire” of other savings products through insurance and capital markets lags other developing regions, and policymakers should set priorities across the matrix of stability, efficiency, inclusion and depth considerations for better performance, according to the study. From a long-term growth standpoint the greatest impact is through deeper engagement and penetration of households and firms, with the latter benefiting especially from stock market new equity issuance. Small business access is limited and low bank trust, around 50 percent in surveys, inhibits individual participation. However splits between expanded use and soundness and other factors are “inadequately addressed” as central banks, finance ministries and government agencies often work at cross-purposes and lack overarching strategies. The IMF and World Bank were involved in early efforts but country authorities have increasingly assumed ownership as in Ukraine’s working group approach under its latest aid program. These blueprints have improved over time but still fail on basic communication and coordination measure and are frequently absent altogether, leaving officials, intermediaries and investors without a common design.

Central Asia and Russia have the most scope for better balance, while Armenia is among the bottom-up leaders still missing overall sophistication. The Czech Republic and Poland are the strongest across indicators, while the Western Balkans is behind on efficiency. Turkey’s emphasis should be on stability through macro-prudential limits with recent years’ credit volatility, the authors suggest. They conclude that the top challenges should be tackling high NPLs, establishing cross-border supervision, running crisis simulations, overhauling state bank governance, and broadening electronic payments networks. Capital markets are often small and could achieve scale with neighbor tie-ups, but international financial center ambitions as in Istanbul, Astana and elsewhere may be extreme. Private pension fund schemes that build the institutional investor base have been overlooked and their portfolio guidelines should not be weighed down with government funding requirements. Poland’s pools shrank with recent social security takeovers and the stock market was off 10 percent on the MSCI index through November. Frontier components with nascent or absent “pillar 2” frameworks were mixed for the period, with Croatia and Ukraine leading the pack with over 15 percent gains; Lithuania and Slovenia with heavy losses; and Estonia, Romania and Serbia flat to modestly positive on shifting spare tire readiness.

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Brazil’s Deconstructed Scandal Sketch
2016 December 14 by admin

Posted in: Latin America/Caribbean
Brazilian shares held on to MSCI-beating 70 percent and EMBI-leading 20 percent gains through November, as the arrested former chief executive of construction giant Odebrecht admitted to kickbacks in a plea deal set to implicate dozens of other members of the business and political elite. The bombshell verdict came as preparations mount for former President Lula’s corruption trial, and the interim Temer government handles new cabinet minister accusations of misconduct in a property transaction. The ceaseless scandal barrage has diverted attention from fiscal reform proposals on state finances, pensions, and long-term spending, as lawmakers in their shadow introduce legislation to place the judiciary on investigative notice and strip its immunity. GDP contracted 3. 5 percent in Q3 and next year minimal growth forecasts have been further pared to the 1 percent and under range with industrial output down double-digits. Inflation with the output slack and stronger real toward 3. 3/dollar has retreated to a likely 5 percent next year, which will enable several hundred basis points of central bank easing in principle. The primary fiscal deficit will remain constant around 2. 5 percent of GDP as public debt creeps up toward 80 percent with residual commitments for provincial rescues. In the balance of payments, the current account hole should stay 1 percent of GDP on good commodity export and foreign direct and portfolio investment numbers, with the latter aided by reconsideration of Mexico’s prospects with President Trump in office. State banks are rationalizing operations and credit books with the headline NPL ratio at 4 percent, but the sector is grappling with a wave of major corporate bankruptcies including the Oi $20 billion telecoms default. Local and foreign creditors have appointed different advisers, and talks have been acrimonious with reference to a possible two-thirds haircut. According to S&P Ratings almost 30 borrowers have been unable to pay in 2016, and restructurings are lengthy and complicated despite recent liquidation procedure overhaul. The biggest debtor Petrobras has been promised domestic and international funds for working capital as it tries to sell assets, including select field rights. On the sovereign front the country as a net creditor became the first developing economy to join the Paris Club, as it may face Portuguese-speaking African exposure in Angola and Mozambique.

Argentina share and bond index advances are in high single-digits a year after President Macri’s election win, and ahead of mid-term legislative polls in 2017, which should keep the House and Senate party configurations intact, but act as a government early economic policy referendum. Growth should be 3 percent next year after 2016’s equal shrinkage on solid agricultural exports and consumption revival, with lower inflation estimated at 15 percent. Real interest rates remain at 5 percent, and bank stocks could take off with personal lending after a long absence during the Kirchner administrations. Social and infrastructure spending will sustain a 5 percent of GDP fiscal gap despite a tax amnesty that may collect $10 billion and staple subsidy rollbacks that dented the President’s popular approval. External debt appetite has surpassed original expectations with $40 billion raised this year in dollar issuance at home and abroad, with a heavy amortization and servicing schedule in the coming months. FDI in contrast has been paltry at $2 billion despite high energy sector interest with tariff adjustments, and critics note that reputation reconstruction still awaits long-term allocation.

Greece’s Unrelieved Debt Digression
2016 December 14 by admin

Posted in: Europe
Greek stocks joined European neighbors with double-digit losses through November after US President Obama on a valedictory visit prodded Brussels for further official debt cancellation, and German Finance Minister Schaeuble dismissed it as a “disservice” ahead of a December Eurogroup meeting dominated by French and Italian election angst. The IMF has argued for an additional break as well while still refusing to participate in the latest program, despite Economy Ministry criticism. The Stability fund holding sovereign bonds may consider long-term fixed rate swaps extending and reducing the load in net present value terms, but operations have yet to be approved. GDP growth was almost 1 percent in Q3 on the best export and consumption performance since 2008, but recession will linger this year before 1-2 percent expansion predicted in 2017, when a 2 percent primary fiscal surplus is the target. Bank deposits rose in October, but the overall EUR 125 billion is the lowest since the early 2000s. The bad loan ratio is stuck at 40 percent as a “huge problem,” according to the Eurozone single supervisor, as Piraeus and National Bank look to enlist foreign distressed debt managers so they can again increase private sector credit, but mortgage foreclosure rules remain in flux and exporters are owed EUR 1 billion in tax rebates clogging cash flow. Prime Minister Tsipras’ popularity is at a nadir as the New Democrats reconstitute under a new leader pledging a business-friendly platform. They have attacked his party’s economic and diplomatic agendas, the latter under fire with rupture of Cyprus reunification negotiations. Island growth has reached 3 percent for a post-crisis high, with tourist arrivals up 15 percent in Q3 on diversion from Mideast security scares.

Turkey with its own 15 percent stock market decline has been a reluctant partner as it also is in a tussle with the EU on a refugee aid for visa-free access deal, with just the first EUR 600 million received of over EUR 3 billion promised. Brussels has criticized President Erdogan’s jailing of thousands of opponents after a failed coup attempt and his proposal to expand the post’s constitutional powers. The lira crashed toward 3. 5/dollar as he repeated suspicions about an anti-Turkey foreign conspiracy and calls for lower interest rates. The central bank commandeered reserves to support the lira and then reversed course to lift the benchmark rate, which should also brake the 5 percent of GDP current account gap. Growth is in the lackluster 2. 5 percent range despite loosening of macro-prudential consumer loan limits, and the currency pass-through threatens double-digit inflation revival. Russian trade and tourism rebound should help accounts into next year, but business confidence will stay shaky with the mass civil servant firings and a previewed referendum on presidential authority which will require parliamentary backing from outside the ruling party. The Czech Republic and Poland have been other share losers, with a coalition reshuffle and speculation over the future of the euro-koruna peg in the former and further relaxation of budget constraints in the latter with reduced mandatory retirement age. The populist government continues to brandish tax measures against foreign banks and retailers, and the 55 percent of GDP public debt statutory ceiling may be formally breached in the confused processes.

China’s Stuttering Strait Talk
2016 December 6 by admin

Posted in: Asia
Chinese A shares continued to languish on the MSCI index into December despite Hong Kong-Shenzhen’s link inaugural, as Taiwan’s component roared ahead 15 percent after US President-elect Trump engaged in direct phone conversation with his island counterpart for the first such bilateral exchange in decades. The call was described as a deliberate harder-line strategy against Beijing on diplomatic, commercial and monetary fronts, with the first 100-day plan explicitly outlining “currency manipulator” designation, as a congressional advisory commission also recommended new curbs on Chinese company American acquisitions. The Obama Administration in its waning days blocked a communications deal citing defense implications, as Beijing authorities signaled their own heightened scrutiny over $150 billion in outward investment from January-October contributing to an estimated $250 billion in Q3 capital outflows and a Yuan trajectory toward 7/dollar. Previously they cracked down on cross-border credit card use and insurance policy purchase as an exit channel, as the central bank reported that offshore renimbi deposits halved the past two years to RMB 1 trillion. Shanghai shares continue to sell off despite the exchange’s earlier Hong Kong connect arrangement, as even the experimental free trade zone has come under pressure to stop flight. GDP growth remains on the 6. 5 percent-plus target, as electricity, rail cargo and bank loan total comprising the so-called Li Keqiang index recently reached a 3-year high. Fixed asset investment rose 8 percent through October, and the property sector accounted for almost one-tenth of output improvement, but retail sales and construction projects have slowed and the combined provincial and central fiscal deficit will top 10 percent of GDP.

The household share of new loans was two-thirds in Q3, and regulators have reportedly ordered a halt to more mortgage business in select cities. The official loan-deposit ratio is 65 percent, but S&P Ratings put it at 80 percent for the biggest banks including off-balance sheet items, and over 100 percent for a swathe of mid-tier lenders. The central bank proposed rules for a “risk cap” on wealth management products, up 10 percent the past year for over RMB 25 trillion outstanding. Home prices continue to increase in 60 of 70 cities, and municipalities such as Nanjing have taken anti-overheating action with a developer borrowing ban. However local government reliance on land sales as a main revenue source weighs against widespread moves, as Beijing tries to forge greater self- responsibility with its formal “no bailout” stance. The state enterprise asset side of the ledger may be in worse shape with over 2000 identified as “zombies,” with total corporate debt due near $400 billion and outsize leverage in heavy industry, building and materials. Hong Kong has felt mainland retrenchment in tourism, luxury property, retail sales and exports, and a November stamp duty hike will further cool housing. Neighboring Macau has returned to growth after a 2-year recession from slack gaming proceeds with the Party’s anti-corruption sweep, as its traditional fiscal surplus likewise slips. Taiwan’s export and output expansion is just 2 percent, and trade and financial relations worsened with the victory of the independence-minded DPP party, which has tacked to seek closer Washington ties. However the container industry had to be rescued and the global tech outlook may be uneven into 2017 despite soothing presidential words.

The CIS’ Stretched Strongman Stridency
2016 December 6 by admin

Posted in: Europe
As US and European election outcomes suggest a softer stance toward Russian sanctions extension and ex-Soviet Union authoritarian leaders sovereign credits have stabilized and bounced, with President elect-Trump’s team reporting a warm phone call with Kazakhstan president Nazarbaev. GDP growth will be half a percent this year, and is due to rise to 2 percent in 2017 with Kashagan field output and higher oil prices and infrastructure building under domestic and China’s One Belt One Road programs. The tenge-dollar exchange rate has settled below 350 as inflation heads towards single digits allowing the central bank to cut the policy rate to 12 percent in November. International reserves are again approaching $100 billion with reduced intervention and the current account expected to return to rough balance. Banking sector consolidation continues with a merger among big state-owned players that may be partially sold through the stock exchange under proposed divestiture plans. The President’s succession remains uncertain amid rumors of poor health, although he has moved security service and family allies into key positions. With currency bottoming, foreign exchange-linked mortgage loan protests have ebbed and authorities otherwise often handle popular discontent as a possible terror threat, drawing condemnation from human rights groups. Washington and Brussels regularly call for peaceful dialogue and greater democracy, but Trump in his initial talks seemed to praise his counterpart’s 25-year tenure and tough governance approach.

Lower-rated Azerbaijan with its own history of media and political crackdowns got into similar trouble on hydrocarbon price correction and massive devaluation, with 3 percent GDP shrinkage this year on accompanying construction collapse. President Aliev put technocrats in charge of an end-decade diversification strategy, and preliminary reforms elevated World Bank competitiveness rankings. Sovereign wealth fund assets are back to $35 billion after diversion for currency and import support, but the current account has remained in surplus with remittance help. After two re-pegs stoked 15 percent inflation, the central bank responded with over 1000 basis points in rate hoists, but the 80 percent financial system dollarization muted their impact.